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A few things instantly come to mind. Bid/ask spreads jump significantly because of the decrease in liquidity. This has a ton of weird downstream effects as the

A few things instantly come to mind. Bid/ask spreads jump significantly because of the decrease in liquidity. This has a ton of weird downstream effects as the "market" prices are less efficient and more risky. You also lose all the money that's driving technological advancements (like that fiber cable). You can think of HFTs as market makers, liquidity providers, and automated price discovery. For their services, they end up being able to slice a penny off the top of a lot of orders.

Bakary 6y ago
I admit I don't know much about this field (hence my question) so I will take your word for it. What sort of magnitude of problem are we talking about for the downstream effects? >You also lose all the money that's driving technological advancements (like that fiber cable). Isn't this circular? If they weren't capturing wealth created by other actors, they tautologically wouldn't have it to invest in the first place. That said, it's true that the money might not then be invested in this sort of technology.
- Raidion 6y ago
  So I'm not an expert either, but financial books are some of my favorite. I think the easy take away is that the bid ask spread is the transaction cost. If you can buy and sell a stock for the same price (minus price movements), it's very efficient to move your money in and out of different assets. With the bid-ask spread being wider, that adds a transaction cost to every trade, as you can't sell for the price you just bought. This means that trades are more expensive and riskier. HFT provides liquidity that reduces those risks. HFT seems to me to be one of those words that means two different things and people select the version of HFT that fits their arguments. "Evil" HFT is a rent seeker that just can get in front of the trades you make without adding value, you're just paying an extra penny or something for transaction. "Good" HFT is a market maker with tons of info who just gets there first every time because they're FAST. You can see how the amount of info HFT turns it "good" or "bad", and that's a tightly held trade secret for most of the trading firms, so it's a grey area.
  - kasey_junk 6y ago
    > "Evil" HFT is a rent seeker that just can get in front of the trades you make without adding value, you're just paying an extra penny or something for transaction. Importantly, those don't exist.

Bakary 6y ago

I admit I don't know much about this field (hence my question) so I will take your word for it. What sort of magnitude of problem are we talking about for the downstream effects? >You also lose all the money that's driving technological advancements (like that fiber cable). Isn't this circular? If they weren't capturing wealth created by other actors, they tautologically wouldn't have it to invest in the first place. That said, it's true that the money might not then be invested in this sort of technology.

Raidion 6y ago
So I'm not an expert either, but financial books are some of my favorite. I think the easy take away is that the bid ask spread is the transaction cost. If you can buy and sell a stock for the same price (minus price movements), it's very efficient to move your money in and out of different assets. With the bid-ask spread being wider, that adds a transaction cost to every trade, as you can't sell for the price you just bought. This means that trades are more expensive and riskier. HFT provides liquidity that reduces those risks. HFT seems to me to be one of those words that means two different things and people select the version of HFT that fits their arguments. "Evil" HFT is a rent seeker that just can get in front of the trades you make without adding value, you're just paying an extra penny or something for transaction. "Good" HFT is a market maker with tons of info who just gets there first every time because they're FAST. You can see how the amount of info HFT turns it "good" or "bad", and that's a tightly held trade secret for most of the trading firms, so it's a grey area.
- kasey_junk 6y ago
  > "Evil" HFT is a rent seeker that just can get in front of the trades you make without adding value, you're just paying an extra penny or something for transaction. Importantly, those don't exist.